Top 5 things IP lawyers must remember about English contract law

The AmeriKat listening to Jason about all the
 contractual principles she never forgets
 to apply in IP cases (obviously....)

In former times when the AmeriKat needed a break from digesting patents, battling e-mailed demands or compiling action lists, she would walk around the corner to a little island of calm where a big brain resided in the form of a dear Kat friend, Jason Rix (Allen & Overy).  Jason, who used to litigate smartphone patents before they were smart has metamorphosed into a general commercial litigator.  This means that, unlike the AmeriKat, not only is English contract law his focus but he loves it.  In his experience some, but not all, IP lawyers are a bit hazy about contract law and yet it matters for settlement and licences. Exclusively for the IPKat, Jason has therefore set out some key principles that IP lawyers might find handy when drafting or reading a contract which relates to IP.  Take it away Jason:

"Principle #1:  Remember, it is an objective test (with the benefit of all the background)

"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." ICS v West Bromwich (per Lord Hoffmann).

So it's not what you, your client or the other side think or wished it means. Breaking that down, there are a number of elements you should consider when interpreting a contract. These are succinctly summarised by Lord Neuberger in Arnold v Britton:

"…focussing on the meaning of the relevant words ... in their documentary, factual and commercial context …assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions." 

You can see this as a sort of waterfall or sequence. The natural and ordinary mean of the words is what matters. Only if this does not yield an answer, and there is ambiguity, should you resort to commercial common sense.

Is your contract a dog's dinner....

In general, we are seeing a return to literalism. The facts of Arnold v Britton neatly illustrate this. The tenants to a 99-year lease of some chalets in the Gower Peninsular were held to a provision which increased the service charge by 10% compounded annually. In 1974 when the leases were entered into and inflation was high this may have made sense. By the end of the lease, the service charge, which started at £90, will be more than £1m. "Tough" said the Supreme Court.

Tenant #2:  Arguments about implied terms are hard to win

M&S v BNP Paribas, another decision of Lord Neuberger, reminds us of how difficult it is to win an argument about implied terms: "a term can only be implied if, without the term, the contract would lack commercial or practical coherence".

Principle #2:  Boilerplate provisions are not bulletproof

A number of recent, and not so recent, decisions illustrate the perils of so-called boilerplate provisions.

1. "No variation" clauses cannot prevent variation. In MWB v Rock the Court of Appeal had to consider a clause which said "All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect." Despite the variation not meeting these critera, the court held the parties to the variation. "Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again… ".
2. You can't stop the court being assisted by the headings. In Citicorp v Castex an interpretation clause in the agreement stated "Headings shall be ignored in construing this Trust Deed." The court, however, found it impossible not to be assisted by one of the headings.
3. "No waiver" clauses cannot prevent there being a waiver. In Tele2 v Post Office there was a fairly standard "no waiver" clause, however the Court of Appeal held that this did not prevent there being a waiver by conduct on the facts.

Principle #3:  The test for the "penalty rule" has been restated

We have learned from the Supreme Court that "The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation." This has resulted in a number of questions not all of which have satisfactory answers: what is a secondary provision; what is a legitimate interest; when is the detriment imposed by a secondary provision out of all proportion to a legitimate interest? The practical point is that all the potentially penal clauses before the Supreme Court (one which deprived an individual that had breached a restrictive covenant of a substantial final instalment and another, more widely reported, dealing with parking fines which this Guest Kat always thought were penal) were held not to be penal. However applying the test in practice is very tricky.

...or are you the Kat who got the cream?

Principle #4:  There is no overriding principle of good faith in English contract law but there are a series of piecemeal solutions to unfairness

1. Good faith is probably about honesty and commercial dealing though it may extend to requiring the parties to have fidelity to their bargain.
2. As a matter of contract law there is no pre-contractual duty of good faith; but a duty to negotiate in a dispute resolution clause may bind the parties see eg Emirates Trading v Prime Mineral.
3. There is an implied duty to act in good faith where a contractual discretion is being exercised see Braganza v BP and The "Product Star" (No 2) [1993] 1 Lloyd's Rep 397.
4. A duty to act in good faith may be implied in fact into long term relational contracts see Yam Seng v ITC (this is the decision of Leggatt J which singlehandedly reinvigorated the question of whether and when English contract law recognised good faith; but, subsequent cases have adopted a minimalist approach.
5. An express duty to act in faith will rarely trump a specific obligation and may militate against the implication of a general duty, see eg Compass v Mid Essex.

Principle #5:  Brexit means Brexit

No post would be complete without a passing reference to Brexit. This Guest Kat does not think that Brexit (whatever it means) will change much if anything of English contract law since it is founded in the common law and, save for certain exceptions (eg consumer protection), is not altered by EU law."